The ball at Time Square wasn’t the only thing that dropped last night. The US economy took a cliff dive thanks to our elected officials on Capital Hill. The so-called “fiscal cliff” has been looming for months. The Senate threw out a life line passing a Bill on New Year’s Day but the House must ratify the Bill before it is presented to The President.

So we’re not there yet, but here’s an outline from the current Bill explaining how it affects your real estate and what it means for 2013:

1. CAPITAL GAINS

-Capital Gains and dividends rose from 15% to 20% depending on your tax bracket. Please keep in mind, the exclusion of $250,000 for singles and $500,000 for married couples is still in place, so as long as you’ve owned your home for at least 2 years and your gains are less than the aforementioned amounts, this increase won’t affect your sale. Dividends for REITs, (Real Estate Investment Trusts), will be affected by the increase, potentially decreasing the value of large apartment complexes and office buildings.

2. DEBT RELIEF ACT

The Debt Relief Act has been extended for at least 1 year. This is a huge sigh of relief for sellers in the Short Sale process. If this act expired, short sellers would have to pay income tax on forgiven debt, further burdening already stressed families.

3. ESTATE TAX

The Estate Tax will also increase. Previously, the exemption was $5.125 million per person at a rate of 35% for any in excess. If we fell off the preverbal cliff, the exemption would drop to $1,000,000 and increase to a rate to 55%. Not good for a sizable number of families across the nation and especially here on the East Coast. With the bill passed early Tuesday morning, the exemption will be set to $5 million at a rate of 40%. Please keep in mind, this is only a bill and is not yet set into law.

4. DEDUCTIONS

Deductions have been capped for singles making more than $250,000 and couples making more than $300,000. If you fall into this bracket you’ll have a limit on the amount you can deduct on your taxes. This includes mortgage interest deductions, depreciation and other investment property deductions. This will not affect most American families but can affect people with jumbo loans as well as investors who have sizable loan interest to deduct and properties to depreciate.

5. INCOME TAXES

Income Taxes increase for earners of more than $450,000 for singles and $500,000 for couples. The increase will be from 35% to 39.6%. This could negatively affect higher end real estate by drying up a pool of potential buyers, but any affects would be minimal.

Please keep in mind, this situation is fluid. Discussions will be on going for at least the next few months. The “Sequester,” or automatic spending cuts going into place at the end of February, has not been addressed nor has a solution for the predicament the debt ceiling will impose… when we reach it… again…